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Performance Management Checklists

Nonperformance and Breach of Contract


Checklist Description

This checklist provides an overview of the consequences of nonperformance and breach of contract.

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Definition

A contract is a legally binding agreement between two or more parties. In certain circumstances, a party may not perform its obligations under the contract or may fail to fulfill other terms of the contract. This constitutes a breach of contract, which, if not remedied, can give the other party the right to claim damages.

Contracts can be written or oral and have expressed terms or implied terms. Written contracts are easier to prove than oral contracts.

If a contract has been breached, the party that has been affected by the breach may be entitled, in certain circumstances, to compensation. In general, a party will only be entitled to compensation by way of damages if it can prove that it has suffered a clear financial loss. There is no compensation for distress or hurt feelings.

The person claiming that the contract has been breached (the claimant) has the onus to prove his/her claim. Claims must be well documented and justified.

The courts take the view that a claim is not a means of turning a loss into a profit. The aim is to put the claimant back in the position in which he or she would have been if a certain event had not occurred. The claimant must show that he/she suffered an actual loss caused by the breach, that the loss is not too remote and is recognized as giving rise to entitlement to compensation, and that there is enough evidence that justifies the damages demanded. In certain circumstances and jurisdictions, such as the United States, the courts can force the breaching party to make a payment as a punishment for the breach of contract. These payments are known as punitive damages.

Damages might not be the only remedy sought by the claimant or awarded by the courts. It may be that the court will oblige the party that has breached to specifically perform and execute the contract.

A party that has either breached a contract or suffered a breach should communicate immediately with the other party to explain or discover why the breach has occurred. In many cases, keeping the lines of communication open can prevent the expense and stress of a court action. There are other ways of dealing with a dispute, such as mediation or conciliation, before a court action is considered.

If all such attempts fail, then, as a last resort, a party can sue for breach of contract and damages.

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Advantages

  • Contracts are entered into for all sorts of reasons. Respecting the terms of contracts will ensure the smooth running of a business and will help to create a good reputation for a business or individual.

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Disadvantages

  • Nonperformance and breach of contract can have severe consequences for the reputation of a business or individual. In certain circumstances, a court decision against an individual or business can negatively influence their credit rating.

  • The damages awarded for breach of contract, as well as the litigation itself, can be costly.

  • Oral contracts are difficult to prove.

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Action Checklist

  • Study carefully any contract you might enter into. Read the contract’s terms and conditions, and ensure that you understand them before you commit.

  • If the terms and conditions offered are not suitable or are too onerous, you may be able to change them through negotiation.

  • Economize by negotiating a reasonable rate with your legal advisers, but remember that it is better to incur costs by obtaining legal advice than to enter into a contract with terms that you do not understand.

  • If you are a consumer, obtain information and advice from relevant consumer protection bodies before entering into a contract.

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Dos and Don’ts

Do

  • Read carefully the terms and conditions of any contract.

  • If necessary, involve your solicitors in the evaluation of both the risks and potential benefits of entering into a particular contract.

  • Negotiate your terms and make a contingency plan for any cost overrun.

  • Remember that a claim is not a way of turning a loss into a profit.

Don’t

  • Don’t make the mistake of being attracted by a contract with terms you do not understand.

  • Don’t enter into a contract if you do not intend to respect its terms.

  • Don’t think that you can automatically obtain damages if a contract is breached by the other party.

  • Don’t overlook the importance of negotiating warranties and indemnities that would protect you in the event that underlying liabilities in the contract are discovered.

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Further reading

Books:

  • Blum, Brian A. Contracts: Examples and Explanations. 5th ed. New York: Aspen Publishers, 2010.
  • Farnsworth, E. Allan. Contracts. 4th ed. Aspen Student Treatise Series. New York: Aspen Publishers, 2004.

Articles:

  • Pearce, David, and Roger Halson. “Damages for breach of contract: Compensation, restitution and vindication.” Oxford Journal of Legal Studies 28:1 (Spring 2008): 73–98. Online at: dx.doi.org/10.1093/ojls/gqm023
  • Shavell, Steven. “Damage measures for breach of contract.” Bell Journal of Economics 11:2 (Autumn 1980): 466–490. Online at: tinyurl.com/y9dlqnl

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